David Olive

I have a client that maintains a Top Hat Plan for certain employees. They have a Participant that separated from service in January of this year. The client has no distribution election form on file and the Participant has no recollection of ever being given one. The Plan is not clear on how distributions are to be made in default of an election. Here are the provisions on Distributions: "A. Provided that the Participant's services with the Employer and all other related employers of the Employer (as determined under section 414 of the IRC) terminates for any reason (other than death), distribution of the amount credited to the Participant's account under this Plan shall commence to, or with respect to, the Participant upon termination of services or at such date elected by the Participant at the time the Participant began participation in the Plan. Payments shall be made in the number of installments initially elected by the Participant. Once commenced, the number of installments shall not be changed or accelerated, except by the application of Section VII (Participant election to Modify the Timing of Benefit Payment). Payments shall be made at such time and in such form as provided in distribution forms provided by the Employer. (i) Participant may elect a distribution of the amount credited to the Participant's account under this Plan in the following form: {A) annual installments. (B) single sum (C) annual installment/single sum combination (D) transfer in-kind B. Distributions will commence 60 days after severance from employment. If a Participant should die before distribution of the full amount of the account described in this Plan has been made to the Participant, any remaining amounts shall be distributed to the Participant's beneficiary by the method designated by the Participant on distribution forms provided by the Company at the time the Participant selected the number of distribution installments. The Participant may designate a payment of a lump sum or the continued payment of the Participant's elected number installments to the beneficiary if distribution has begun. If distribution has not begun before death of the Participant, payment to the beneficiary shall be made in a lump sum or not more than five installments. If a Participant has not designated a beneficiary, or if no designated beneficiary is living on the date of distribution, the amount credited to the account shall be distributed to the Participant's estate in a lump sum distribution as soon as administratively feasible following the Participant's death. The Participant may change the designation of beneficiary in writing delivered to the Company before termination of services to the Company." Appreciate any thoughts on how payments should be made, whether this is a provision of the Plan that could be amended to provide for an explicit default payment method, and whether there are any issues with delaying commencement of payments after the required 60 days (although, still in same taxable year so maybe not as big of an issue).

Account Owner of IRA failed to take RMD for 2022 (account owner was incapacitated and under conservatorship). Account owner subsequently passes away in 2023. The question is, how does 2022 RMD get addressed? Are the beneficiaries liable for the 2022 RMD?

An employer hires an employee in 2021 and pays a $10,000 signing bonus. Two months after beginning employment, Employee enters 401(k) Plan. In 2022, Employee terminates service and, under terms of employment contract, pays back sign on bonus by issuing a personal check in 2022. Does this reduce that employees compensation in 2022 for purposes of Testing, if using the definition of Compensation under 414(s)? I am inclined to say no, as you simply look at what the Employer paid the Employee during 2022. Does this require new testing for 2021?

No, they worked there and received W2's.

I have a client that maintains a solo 401(k), and while meeting with them to prepare their plan restatement, it appears that they let their two children work part-time during 2020 and 2021. The plan document provides no conditions for eligibility, and only excludes non-resident aliens and union employees. So, it appears that the children should have been allowed to defer to the Plan and their missed deferral opportunity constitutes an operational failure. As a result of the daughters working as part-time employees, it appears that the Plan can no longer be considered a solo 401(k), and thus must now: 1. Distribute a Summary Plan Description. 2. File a Form 5500-SF instead of 5500-EZ. 3. Must now perform non-discrimination testing 4.Must now perform coverage testing. 5. ....? Is there anything else I may be missing? Upon review of EPCRs, the missed deferral opportunity itself seems like an "insignificant" operational failure, and thus eligible for SCP, but concerned that the overall effects of making it no longer a Solo 401(k) may require a VCP correction. Any other thoughts?

The Plan document currently provides that forfeitures may be allocated to Nonelective Contributions and to pay Plan Expenses. The Employer would like to amend the Plan to allow forfeitures to be allocated to, in addition to Nonelective Contributions and Plan Expenses, also to: (1) Additional Matching Contributions, (2) Applied to Reduce Nonelective Contributions and (2) Applied to Reduce Matching Contributions. My initial thoughts are this amendment should be effective the beginning of the next plan year to avoid a potential Anti-Cutback violation? Any other issues I may be missing?

Plan Administrator wishes to exclude HCEs from participating under the Plan in order to pass minimum coverage tests under 1.410(b)-2(b)(6). In order to avoid minimum coverage failure for 2021 Plan Year, Plan Administrator proposes adopting amendment to exclude HCEs retroactively to 01-01-2021. The Plan does have one HCE currently participating the Plan. If the Plan Administrator adopts the amendment, can the deferrals for 2021 year be refunded to the HCE (and included in gross income of the HCE), since the HCE is no longer eligible, so that no HCE benefits under the Plan for the 2021 plan year and the Plan passes minimum coverage? Any problems or issues with this I am missing?

A Plan failed to timely file Form 5500-SF for Plan Years 2018 and 2019 (12-31 Plan Year Ended) until July 2021. Upon filing the returns, the Plan Sponsor receives notice from the IRS of penalties for failing to file for those years. My question is related to relief from penalties under DOL. I know that the Plan is not yet disqualified from relief under DFVCP, however what if the delinquent returns have already been filed before applying for relief under DFVCP? Should amended returns be refiled showing the box labeled “DFVC program” located in Part I, Line D of the Form 5500-SF checked?

There is none, to my surprise.

A corrective amendment under 1.401(a)(4)-(11)(g).

Thank you very much for point out that issue. Although I had not considered that issue, I do not think that becomes an issue here as the Employer only has one HCE, however, that is very good to know.

We are correcting the minimum coverage failure by adopting a separate retroactive amendment and making a QNEC in order to bring the plan into compliance for the plan years in which a failure occurred.

Plan A excludes a large class of employees that are required to be included in testing for minimum coverage. Coverage testing had never been an issue in the past due to there being no HCEs (non-profit entity, so no owners). Now there is a HCE under compensation rules, and we have a coverage test failure. Plan Sponsor of Plan A wishes to amend Plan A going forward so that HCE's are excluded from participating in order to pass minimum coverage under Treas. Reg. Section 1.410(b)-2(b)(6). Does this proposed amendment violate Anti-Cutback provisions? Any other concerns?

Employer wants to encourage longevity, is looking at offering benefits to certain retired employees that meet certain requirements. Example: A Cafeteria Plan is amended to allow only active group health insurance plan participants who are at least 60 years of age but younger than 65 (i.e. Medicare eligibility) AND have a minimum of 10 years of GSB service to participate in the Plan after retirement would that be allowed? I'm looking at 1.125-7(b)(2), which requires any "employee" (and I believe, would also include former employees) with 3 years of employment to participate in the Plan. Can any further service requirements for former employees be added?

Do the Plan Aggregation Rules of 409A apply to employee benefit plans not subject to 409A? I think the answer is no, however after reading the regulations it does not appear immediately clear.

Thank you all. This has been a good resource with there being such little guidance on this issue.

Yes, very similar in that the foundation (Org B)exists solely to raise funds for the operating entity (Org A).

I failed to mention that while the organizations do not fall under common control under the tests in 1.414(c)-5(b), the organizations are related. Organization B is a foundation that provides fundraising for Organization A, a nonprofit entity that employs disabled people to provide services to local businesses. They do have some board members that serve on both organizations (below 80%), and the executive for Organization A described above is a non-voting board member of Organization B.

Organization A is a tax-exempt organization under Section 501(c)(3) and maintains a 401(k) Plan. CEO of Organization A is a highly compensated employee for Plan Year 2020, which causes the Plan to fail minimum coverage testing. CEO wishes to lower his compensation so that he is no longer a HCE for future years, and instead receive the same amount of compensation from Organization B, which is also a tax-exempt organization. The two tax-exempt organizations are not under common control under the rules of 1.414(c)-5(b), and thus do not appear to be related employers. (80% of directors of one organizations are not representatives of, or controlled by, the other organization). If CEO of Organization A wishes to lower his compensation from Organization A, and receive that same amount from Organization B to make up for that (in an attempt to keep his compensation the same, but avoid violation of minimum coverage rules for Plan maintained by Organization A), does this violate the anti-abuse rule of Section 1.414(c)-5(f)? That rule states as follows: "Anti-abuse rule.— In any case in which the Commissioner determines that the structure of one or more exempt organizations (which may include an exempt organization and an entity that is not exempt from income tax) or the positions taken by those organizations has the effect of avoiding or evading any requirements imposed under section 401(a), 403(b), or 457(b), or any applicable section (as defined in section 414(t)), or any other provision for which section 414(c) applies, the Commissioner may treat an entity as under common control with the exempt organization." Not finding any guidance on the subject. Does not appear I can get around the Anti-Abuse rule, but thought I would see if anyone had seen anything like this before.

This is a great topic with amendment for the CARES Act, and I had a similar situation in which the client adopted provision to allow participants to elect not to take RMDs for 2020 calendar year. This provision was adopted after 12/31/2020. There were only 2 participants that were required to take RMDs. The client does not wish to distribute a SMM for an expired plan provision that is not applicable anyways to the vast majority of participants. Sounds to me like a SMM not required?

Client owns a 50% membership interest in an LLC being taxed as a partnership. LLC had a loss on the year, however, the client received taxable income in the form of guaranteed payments. This amount qualified as "earned income" and can be contributed to an IRA, correct?